Defi is a subset of the cryptocurrency industry. Most of the underlying technology that powers the crypto-economy can be called decentralised, since that’s a basic characteristic that all blockchains share.
The difference with Defi is that it’s focused specifically on utilising this ability to actively manage your wealth, without requiring the permission of anyone, be it a bank, credit agency, or financial regulator, to participate.
A blockchain on its own can’t recreate traditional financial services; it’s merely the engine that powers Defi. To make it drive, there needs to be wheels and a chassis attached, which is where DEFI comes in, using decentralised applications (dApps) that make it easy to interact with the underlying blockchain, and enable you to manage and grow your cryptocurrency .
You’ll often hear the term Defi used in the context of Ethereum, the largest smart contract network in the world and the second most valuable cryptocurrency (ETH) after BTC, based on market capitalization.
To date, most of the Defi industry runs on the Ethereum blockchain, but many other networks such as Polkadot, TomoChain, and Tron also offer Defi services.
Regardless of the blockchain being used to support it, Defi operates in the same way. Primitives are core services that are used to anchor decentralised finance. Developers then build applications upon these primitives to create products and services for interacting with Defi.
Composability describes the chaining together of Defi primitives to create new services, building upon their codebase and combining it with a user-friendly interface. Defi primitives are sometimes described as Legos, because they can be stacked together like Lego blocks to create new services.
Examples of Defi primitives include MakerDAO, whose protocol allows anyone to use their crypto assets as collateral to mint stablecoins, Curve, which is a protocol for swapping stablecoins, and Compound, which is a platform for lending and borrowing.
Second layer platforms such as Yearn Finance and Pickle build upon these capabilities, making it easier for users to take advantage of the underlying service.
We can think of Defi as a layered sandwich with the following ingredients:
- Bottom layer: blockchain network (e.g. Ethereum)
- Middle layer: Defi primitive (e.g. Maker or Compound)
- Top layer: application (e.g. Yearn Finance)
Combine the three and you end up with a powerful set of tools that recombine the world of traditional finance in a crypto context.
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